The IRS has decided that every poker operator in the United States will have to report anyone who wins more than $5,000 in a poker tournament.

To get around the fact that Congress never authorized this, IRS is pretending to require that 25% or more of these winners’ prizes have to be withheld by the poker operators and forwarded to the IRS.

That is only partially true.

Buried in the IRS’s published statement changing the tax treatment of poker tournaments is the following sentence:
“The IRS will not assert any liability for additional tax or additions to tax for violations of any withholding obligation with respect to amounts paid to winners of poker tournaments... provided that the poker tournament sponsor meets all of the requirements for information reporting” under the tax code and regulations.

What this means is the IRS has declared that poker tournament operators are absolutely required to withhold at least 25%, but that the IRS won’t add any tax penalties or fines to operators who voluntarily turn in their big tourney winners.

I hate laws like this.

What apparently happened was that when word got out that the IRS was going to devastate poker tournaments, land-based casinos lobbied for a compromise. This is exactly what lobbyists are supposed to do, assuming they cannot get the regulator to completely drop the idea.

The result is better for players. As one example: If withholding were required, anyone who won a $10,000 buy-in to the WSOP would actually collect only $7,500. Now, the player wins the seat, but is reported on a Form W-2G to the IRS.

Of course, this is still bad news for winners. A W-2G is practically an invitation to be audited.

The compromise has created other problems. Some land-based card clubs and casinos are withholding while others are not. This is not just because this “waiver of liability,” as the IRS calls it, is hard to find and decode. Conservative lawyers and accountants might still advise their clients to send a chunk of big winners’ prizes to the IRS.

The problem is that the IRS says it is interpreting the Internal Revenue Code, which contains criminal penalties for non-compliance. Notice that the IRS only promised not to impose “additional tax or additions to tax.”

Plus, the actions of the IRS are highly questionable.

When people think of laws, they naturally think of statutes passed by legislatures, like Congress. Every adult knows there is another set of laws that is at least as important in their everyday life: regulations from government agencies, like the IRS. Both statutes and regulations require public input.

We know what happens when the public is not allowed its say. You end up with statutes like the Unlawful Internet Gambling Enforcement Act, or this new rule on poker tournaments from the IRS.

For the IRS did not propose a regulation. Nothing was published. There was no opportunity for card rooms, let alone players, to object.

The IRS simply declared that it was reinterpreting a law passed by Congress in 1976, containing a term, “wagering pool,” which dates back to the 1950s. Nobody, before now, thought “wagering pool” included poker or other games. In fact, everyone knew it didn’t, because it is exclusively lumped in with lotteries and bookmaking.

The IRS has now declared that when Congress required withholding of “wagering pools,” it meant to include poker tournaments. But, the IRS is giving a free pass to every card room and casino which openly violate a law passed by Congress, so long as they voluntarily turn in their big winners.